Banks Are Getting Bad Mortgages Off Their Books By Giving Homeowners Cash To Walk Away

Bloomberg is reporting that banks, desperate to rid their balance sheets of burdensome bad home loans, have adopted a new strategy.

Instead of foreclosure, banks are paying homeowners to walk away from underwater mortgages and then selling the homes at current market values.

Such tactics, called 'short sales', do result in losses, but because foreclosure is a lengthy and expensive process, lenders have come to realize the drawbacks are worth it:

Lenders have routinely delayed or blocked such transactions, known as short sales, in which they accept less from a buyer than the seller’s outstanding loan. Now banks have decided the deals are faster and less costly than foreclosures, which have slowed in response to regulatory probes of abusive practices. Banks are nudging potential sellers by pre-approving deals, streamlining the closing process, forgoing their right to pursue unpaid debt and in some cases providing large cash incentives, said Bill Fricke, senior credit officer for Moody’s Investors Service in New York.

According to the article, Bloomberg has obtained a letter that JP Morgan has sent some homeowners, dated August 31, saying that they could, "sell your home, owe nothing more on your mortgage and get $30,000..."

The incentives for banks to move poorly performing home loans off their books are not just related to the impact the loans themselves have on their balance sheets.

Banks are eager to see economic growth accelerate and the volume of homes either in foreclosure proceedings or beneath their loan value continues to dampen growth. The article argues that short sales offer an opportunity to alleviate the particular problem of poorly performing mortgage assets while also aiding in a broader and sustained economic recovery.